How to Improve Liquidity: 4 Strategies for Middle-Market Companies

Even if your business is struggling to secure financing in today’s economic climate, there are other effective ways to improve liquidity and grow.

Liquidity is always important for businesses, but it’s especially important now amid high levels of economic uncertainty.

Chief financial officers (CFOs) and treasurers overseeing middle-market companies are the most vulnerable. According to a 2023 survey by AlixPartners, 94% of corporate workout professionals believe that middle-market businesses face the highest disruption exposure.

This vulnerability extends beyond financing access. Large enterprise buyers with the leverage to extend payment terms can impact your working capital. Moreover, your cash buffer is most likely more constrained than theirs. Your business may also be more susceptible to market fluctuations.

Thankfully, there are several strategies you can use to offset these risks and maintain enough liquidity to operate and grow.

How to improve liquidity: 4 key strategies

1. Create regular, short-term financial forecasts

The first step to improving liquidity is to invest more time in creating actionable, updated forecasts. This will enable you to make smarter financial decisions and adapt quickly to disruption. 

Regular forecasting might seem like an obvious strategy, but the key is to make it a coordinated effort. Many companies relegate forecasting to financial teams rather than include other relevant departments. Your operations and sales activities hugely impact liquidity, so it’s important for these functions to collaborate with finance and treasury when developing reports, forecasts and action plans. This will provide a more comprehensive view of how your business generates and uses its cash. Communicating with your buyers and suppliers can also be helpful for forecasting, because they may have valuable insights about expected demand or term changes that could influence your numbers.

Aim to create three-month forecasts. This is ideal for balancing accuracy with sufficient lead time for strategic moves, such as marketing and purchasing decisions. Make sure to account for various scenarios, such as changing demand levels. Your forecasts should include predictions for the three core financial statements: the income statement, balance sheet and cash flow. With a focus on improving liquidity, it can be useful to pay close attention to your:

• Cash ratio: Measures liquidity.
• Free cash flow: Measures your available surplus cash after covering basic operating expenses.
• Operating cash flow: Measures the cash generated by your everyday business operations.
• Cash conversion cycle: Measures how long it takes to turn inventory into cash from sales.

Forecasts will look different for every business. When in doubt, remember the main goal is to identify your largest cash sources, liquidity requirements and liquidity risks.

2.Maximise profitability while lowering overhead

Armed with the information from your forecasts, determine the best strategies for building liquidity. Do you have buyers or offerings that generate more revenue than others? If there are clear winners, consider optimising your operations for these products and services and reducing or eliminating the less profitable ones. 

Aside from increasing profits, focus on cash flow generation through buyer payments. For example, prioritise small buyers with short payment terms or those seeking inventory that is ready to ship. Even if these are smaller orders, the quick turnaround will build liquidity when you’d otherwise be waiting 30, 60 or more days for large buyer payments to clear.

As you seek opportunities for greater profit, you can also look for areas where you may be able to cut costs. This could mean:

• Selling unused assets or other parts of your business.
• Leasing rather than owning your assets.
• Negotiating better vendor pricing or seeking alternative vendors.
• Postponing nonessential investments for more stable conditions. 
• Discounting or liquidating slow-moving inventory. You may even be able to write off unused or obsolete inventory on your taxes.

Artificial intelligence (AI) tools may allow you to uncover other cost-cutting opportunities. For example, process mining solutions could identify more efficient operating practices in your business. AI-powered supply chain management software can provide real-time insights about supplier volumes and prices to optimise your procurement process. Advancements in AI mean that these solutions are now accessible to middle-market companies, not just leading enterprises.

3. Secure credit proactively

Even if your company’s financial health is stable, it’s wise to secure access to credit lines, term loans or other debt facilities through a banking partner ahead of time. It’s always better to be prepared for cash shortages than scramble to find funds when it’s too late. Plus, it may be even harder to qualify by the time you’re in a liquidity crisis. 

Unsure of your eligibility? Review your credit history for potential errors that could damage your credit score. Some lenders may also be willing to recognise a formal plan outlining how you will make payments if economic conditions worsen. Most banks are more flexible with their requirements for asset-based loans, which use your business’s assets as collateral. As a proactive measure, revisit your existing lender relationships to determine how their requirements may change and whether you’re able to meet them. 

When traditional financing options aren’t feasible, fintech solutions such as peer-to-peer lending and “buy now, pay later” options for businesses are possible alternatives. Many digital lending solutions use alternative credit scoring, which uses information such as your accounting and banking data to evaluate risk, rather than credit history. 

4. Incentivise buyers for faster payments

Instead of borrowing funds, though, your best bet may lie in accounts receivable management. Encouraging faster invoice payments will improve cash flow without adding debt or requiring a long application process.

One way to expedite payments is by offering buyers discounts in exchange for early payment. While this strategy has been around for decades, fintech providers are revolutionising the practice by incorporating market data and making terms more equitable for buyers and suppliers. For example, C2FO’s Early Pay solution is a buyer-initiated programme that facilitates early payment discounts through an online platform. If any of your buyers support C2FO, you can:

• Sign up for a free account.
• Select approved invoices for early payment.
• Set a discount rate of your choosing.
• Receive payments in as little as 24 hours if your buyer accepts the offer.

Because the only cost to you is the discount itself, such programmes can generate liquidity at a much lower cost than other financing options. Many middle-market suppliers have found success with this approach to fund operations and invest in growth, even during an economic downturn.

How to improve liquidity: the bottom line

The best thing your company can do to stay resilient is maintain liquidity. Unifying your finance, sales and operations teams to create short-term forecasts, leveraging revenue opportunities, and exploring your financing options well in advance are all smart ways to improve cash access. 

When outside financing isn’t an option — or you simply want to give your balance sheet an edge — early payment programmes provide a debt-free way to help your middle-market company meet its growth goals.

Learn more about C2FO’s Early Pay solution to improve your business’s liquidity.